Debunking the Crypto-Terrorism Financing Myth
Blockchain analytics firm Chainalysis has discredited media reports and analyses that have exaggerated the involvement of cryptocurrencies in terrorism financing.
In a recent report aimed at dispelling misconceptions about the use of crypto in funding terrorism, Chainalysis data shed light on the minor role that digital assets play in such activities.
A Small Fraction of Illicit Transactions
Chainalysis emphasized that, while some terrorist organizations, like Hamas, Jihad, and Hezbollah, do use cryptocurrencies to raise and transfer funds, these transactions represent only a tiny fraction of the already limited volume of illicit crypto transactions.
“Terrorism financing is a very small portion of the already very small portion of cryptocurrency transaction volume that is illicit,” stated Chainalysis.
The report highlighted that terrorist groups have historically relied on traditional fiat-based methods such as financial institutions, hawala, and shell companies as their primary funding channels, a trend that is expected to continue.
Chainalysis underscored that the transparency of blockchain transactions makes cryptocurrencies less appealing to terrorists. This transparency enables law enforcement to trace the origin and destination of every blockchain transaction, a task nearly impossible with cash transfers.
Addressing Estimation Flaws
The report also tackled the flaws in estimating the flow of crypto into terrorist accounts, especially in the aftermath of events like the recent Hamas attack on Israel.
Chainalysis noted that estimates of cryptocurrency-related terrorism financing tend to be exaggerated when analysts include all transactions processed by intermediary service providers, not just those directly linked to terrorist groups.
The report cautioned that while large sums of cryptocurrency may seem connected to terrorists, a significant portion of these funds are unrelated. To enhance anonymity, most service providers combine multiple transactions from different users, making it difficult to provide accurate estimates.
The report provided an example of a wallet associated with terror financing that had approximately 20 suspected service providers as counterparties. On one of these counterparties, the firm identified multiple transactions involving substantial amounts of cryptocurrency, totaling over $82 million.
Chainalysis pointed out that it would be misleading to conclude that all these funds were intended for terrorism financing. Upon further investigation, the analytics firm discovered that only about $450,000 worth of cryptocurrency from the known terror-affiliated wallet had been transferred through this specific counterparty.
The report also urged investigators to consider the role of service providers, whether knowingly or unknowingly, in facilitating the movement of terrorism-related funds. Notably, the Israeli government recently took action by disabling over 100 Binance accounts that were potentially linked to Hamas.